FRIAS V.

SAN DIEGO-SISON
G.R. No. 155223, April 4, 2007

FACTS: Petitioner and Respondent entered into a MOA concerning a house and
lot property. For this, respondent gave Php 3 Million to the petitioner. They have
stipulated among others that in the event the respondent decides not to purchase the
property, the Php 3 Million would be treated as a loan payable in 6 months and the
property as security for the mortgage that can be enforced under the law.
Respondent decided not to purchase the property and notified petitioner through a
letter, reminding the petitioner of the agreement to treat the given amount as loan.
Petitioner failed to pay prompting the respondent file a complaint. RTC issued a writ of
preliminary attachment thereof. After trial, RTC found for respondent. CA affirmed trial
court findings.

In her appeal, the petitioner contended that: (a) the interest, whether at 32% per
annum awarded by the trial court or at 25% per annum as modified by the CA which
should run from June 7, 1991 until fully paid, is contrary to the parties’ MOA; (b) the
agreement provides that if respondent would decide not to purchase the property,
petitioner has the period of another six months to pay the loan with compounded bank
interest for the last six months only; (b) the CA’s ruling that a loan always bears interest
otherwise it is not a loan is contrary to Art. 1956, NCC which provides that no interest
shall be due unless it has been expressly stipulated in writing.

ISSUES: Whether the compounded bank interest should be limited to 6 months

only as stipulated in the contract; whether CA committed error in awarding 25% interest
per annum on the 2 million peso loan even beyond the second 6 months stipulated
period; whether San Diego-Sison is entitled to moral damages.

RULING: “While the CA’s conclusion, that a loan always bears interest otherwise
it is not a loan, is flawed since a simple loan may be gratuitous or with a stipulation to
pay interest, we find no error committed by the CA in awarding a 25% interest per
annum on the two-million peso loan even beyond the second six months stipulated
period. The MOA executed between the petitioner and respondent is the law between
the parties.” “Their agreement speaks of two (2) periods of six months each. The first
six-month period was given to respondent to make up her mind whether or not to
purchase petitioner's property. The second six-month period was given to defendant-
appellant to pay the P2 million loan in the event that plaintiff-appellee decided not to buy
the subject property in which case interest will be charged "for the last six months only",
referring to the second six-month period. This means that no interest will be charged for
the first six-month period while appellee was making up her mind whether to buy the
property, but only for the second period of six months after appellee had decided not to
buy the property. This is the meaning of the phrase "for the last six months only".
Certainly, there is nothing in their agreement that suggests that interest will be charged
for six months only even if it takes defendant-appellant an eternity to pay the loan .The
agreement that the amount given shall bear compounded bank interest for the last six
months only, i.e., referring to the second six-month period, does not mean that interest
will no longer be charged after the second six-month period since such stipulation was
made on the logical and reasonable expectation that such amount would be paid within
the date stipulated. Considering that petitioner failed to pay the amount given which
under the Memorandum of Agreement shall be considered as a loan, the monetary
interest for the last six months continued to accrue until actual payment of the loaned
amount. The payment of regular interest constitutes the price or cost of the use of
money and thus, until the principal sum due is returned to the creditor, regular interest
continues to accrue since the debtor continues to use such principal amount. It has
been held that 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, would constitute unjust enrichment on the part of the debtor at the expense of
the creditor. Petitioner and respondent stipulated that the loaned amount shall earn
compounded bank interests, and per the certification issued by Prudential Bank, the
interest rate for loans in 1991 ranged from 25% to 32% per annum. The CA reduced the
interest rate to 25% instead of the 32% awarded by the trial court which petitioner no
longer assailed.
 SIGA-AN vs. ALICIA VILLANUEVA
G.R. No. 173227, January 20, 2009

FACTS: On 30 March 1998, respondent Alicia Villanueva filed a complaint for

sum of money against petitioner Sebastian Siga-an before the Las Pinas City Regional
Trial Court. Respondent alleged that she was a businesswoman engaged in supplying
office materials and equipments to the Philippine Navy Office (PNO), while petitioner
was a military officer and comptroller of the PNO from 1991 to 1996.

Villanueva claimed that sometime in 1992, petitioner Siga-an approached her

inside the PNO and offered to loan her the amount of ₱540,000.00. Since she needed
capital for her business transactions with the PNO, she accepted petitioner’s proposal.
The loan agreement was not reduced in writing. Also, there was no stipulation as to the
payment of interest for the loan.

On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner

as partial payment of the loan. On 31 October 1993, she issued another check in the
amount of ₱200,000.00 to petitioner as payment of the remaining balance of the loan.
Petitioner told her that since she paid a total amount of ₱700,000.00 for the
₱540,000.00 worth of loan, the excess amount of ₱160,000.00 would be applied as
interest for the loan.

Not satisfied with the amount applied as interest, petitioner pestered her to pay
additional interest. Petitioner threatened to block or disapprove her transactions with the
PNO if she would not comply with his demand. As all her transactions with the PNO
were subject to the approval of petitioner as comptroller of the PNO, and fearing that
petitioner might block or unduly influence the payment of her vouchers in the PNO, she
conceded. Thus, she paid additional amounts in cash and checks as interests for the
loan. She asked petitioner for receipt for the payments but petitioner told her 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 ₱1,200,000.00.

Thereafter, respondent consulted a lawyer regarding the propriety of paying

interest on the loan despite absence of agreement to that effect. Her lawyer told her that
petitioner could not validly collect interest on the loan because there was no agreement
between her and petitioner regarding payment of interest. Since she paid petitioner a
total amount of ₱1,200,000.00 for the ₱540,000.00 worth of loan, and upon being
advised by her lawyer that she made overpayment to petitioner, she sent a demand
letter to petitioner asking for the return of the excess amount of ₱660,000.00. Petitioner,
despite receipt of the demand letter, ignored her claim for reimbursement.

Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) ₱660,000.00 plus legal interest from the time of demand; (2)
₱300,000.00 as moral damages; (3) ₱50,000.00 as exemplary damages; and (4) an
amount equivalent to 25% of ₱660,000.00 as attorney’s fees.

Petitioner insisted that there was no overpayment because respondent admitted

in the latter’s promissory note that her monetary obligation as of 12 September 1994
amounted to ₱1,240,000.00 inclusive of interests. He argued that respondent was
already estopped from complaining that she should not have paid any interest, because
she was given several times to settle her obligation but failed to do so. He maintained
that to rule in favor of respondent is tantamount to concluding that the loan was given
interest-free. Based on the foregoing averments, he asked the RTC to dismiss
respondent’s complaint.

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

HELD: (1) No. Compensatory interest is not chargeable in the instant case
because it was not duly proven that respondent defaulted in paying the loan and no
interest was due on the loan because there was no written agreement as regards
payment of interest. Article 1956 of the Civil Code, which refers to monetary interest,
specifically mandates that no interest shall be due unless it has been expressly
stipulated in writing. As can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an express stipulation for the payment
of interest; and (2) the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of monetary interest.
Thus, we have held that collection of interest without any stipulation therefor in writing is
prohibited by law.

(2) Petitioner cannot be compelled to return the alleged excess amount paid by
respondent as interest. Under Article 1960 of the Civil Code, if the borrower of loan pays
interest when there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the
principle of solutio indebiti. Said provision provides that if something is received when
there is no right to demand it, and it was unduly delivered through mistake, the
obligation to return it arises. In such a case, a creditor-debtor relationship is created
under a quasi-contract whereby the payor becomes the creditor who then has the right
to demand the return of payment made by mistake, and the person who has no right to
receive such payment becomes obligated to return the same. The quasi-contract of
solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another. The principle of solutio indebiti applies where (1) a
payment is made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment; and (2) the payment is made
through mistake, and not through liberality or some other cause. We have held that the
principle of solutio indebiti applies in case of erroneous payment of undue interest.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,
exemplary damages may be imposed if the defendant acted in an oppressive manner.
Petitioner acted oppressively when he pestered respondent to pay interest and
threatened to block her transactions with the PNO if she would not pay interest. This
forced respondent to pay interest despite lack of agreement thereto. Thus, the award of
exemplary damages is appropriate so as to deter petitioner and other lenders from
committing similar and other serious wrongdoings.
 ROLANDO DE LA PAZ VS. L & J DEVELOPMENT COMPANY
G.R. No. 183360, September 8, 2014

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.
 SPS. JUICO V. CHINA BANKING CORP.
G.R. No. 187678, April 10, 2013
Villarama, Jr., J.:

FACTS: Sps. Ignacio and Alice Juico, obtained a loan from China Banking
Corporation (respondent) as evidenced by two Promissory Notes both dated October 6,
1998 for Php 6,216,000 and Php 4, 139,000, secured by a Real Estate Mortgage over
their White Plains property. Sps. Juico failed to pay the monthly amortizations due so
CBC demanded the full payment of the outstanding balance with accrued monthly
interests (interests varying from 15% to as high as 24.5% such that the total
indebtedness ballooned to P 19, 201, 776.63). The mortgaged property was sold at
public auction, with CBC as highest bidder for the amount of P10,300,000. On May 8,
2001, Sps. Juico received a demand letter from CBC for the payment of P
8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure
sale to the mortgage debt. As its demand remained unheeded, respondent filed a
collection suit in the trial court. Sps. Juico admitted the existence of the debt but averred
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.
Annabelle Yu, CBC’s Senior Loans Assistant who handled the account of Sps. Juico,
testified 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. Ignacio Juico admitted 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. He further testified that he is a
Doctor of Medicine and admitted having read the promissory notes and that he is aware
of his obligation under them before he signed the same. RTC ruled in favor of CBC. CA
affirmed. The CA recognized respondent’s right to claim the deficiency from the debtor
where the proceeds of the sale in an extrajudicial foreclosure of mortgage are
insufficient to cover the amount of the debt. Also, it found as valid the stipulation in the
promissory notes that interest will be based on the prevailing rate. It noted that the
parties agreed on the interest rate which was not unilaterally imposed by the bank but
was the rate offered daily by all commercial banks as approved by the Monetary Board.
Having signed the promissory notes, the CA ruled that petitioners are bound by the
stipulations contained therein.

ISSUE: Whether or not the interest rates imposed by CBC are valid?
 HELD: NO. Sps. Juico contend that the interest rates imposed by respondent are
not valid as they were not by virtue of any law or BSP regulation. They insist that the
interest rates were unilaterally imposed by the bank.

The appeal is partly meritorious. The binding effect of any agreement between
parties to a contract is premised on two settled principles: (1) that any obligation arising
from contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Escalation clauses refer to stipulations allowing an
increase in the interest rate agreed upon by the contracting parties. 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. Here, the escalation clause is void because it grants
respondent the power to impose an increased rate of interest without a written notice to
petitioners and their written consent. Respondent’s monthly telephone calls to
petitioners advising them of the prevailing interest rates would not suffice. A detailed
billing statement based on the new imposed interest with corresponding computation of
the total debt should have been provided by the respondent to enable petitioners to
make an informed decision. An appropriate form must also be signed by the petitioners
to indicate their conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. Modifications in the rate of interest for
loans pursuant to an escalation clause must be the result of an agreement between the
parties. Unless such important change in the contract terms is mutually agreed upon, it
has no binding effect. In the absence of consent on the part of the petitioners to the
modifications in the interest rates, the adjusted rates cannot bind them. Any interest in
excess of 15% (the interest rate imposed on the first year) is invalid.
 SILOS VS. PHILIPPINE NATIONAL BANK (2014)
G.R.No. 181045, July 2, 2014

FACTS: In August 1987, to secure a one-year revolving credit line of P150,000

obtained from PNB, petitioner spouses Silos constituted a Real Estate Mortgage over a
370 sqm. lot in Kalibo, Aklan. In July 1988, the credit line was increased to P1.8 million
and the mortgage was correspondingly increased to P1.8 million. In July 1989, 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 sqm. lot. In addition, petitioners issued eight (8) Promissory Notes and
signed a Credit Agreement. The July 1989 Credit Agreement, the eight Promissory
Notes, and the Real Estate Mortgage agreement all provided the same right to PNB to
increase or reduce interest rates “at any time depending on whatever policy PNB may
adopt in the future. ”In August 1991, an Amendment to Credit Agreement was
executed by the parties, under which, petitioners issued in favor of PNB an additional
18 Promissory Notes (making the total 26). 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.” On the other hand, the 18th up to the
26thpromissory notes provided 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.”
Petitioners religiously paid the interests without objection or fail. But in 1997, petitioners
faltered when the interest rates soared due to the Asian financial crisis. Petitioners’ sole
outstanding promissory note for P2.5 million – PN 9707237 (the 26th P/N) became due
on October 28, 1997 and was not paid. PN9707237 provided for the penalty equivalent
to 24% per annum in case of default. Thus, PNB foreclosed on the mortgages. On
January 14, 1999, the two lots were sold to PNB at auction for the amount of
P4,324,172.96.21More than a year later, or on March 24, 2000, petitioners filed a case
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. Consequently, petitioners should only be made liable for interest
at the legal rate of 12%. They claimed that due to this overpayment of steep interest
charges, their debt should now be deemed paid, and the foreclosure and sale of the
mortgaged lots became unnecessary and wrongful. As for the imposed penalty of
P581,666.66, petitioners alleged that since the Real Estate Mortgage and the
Supplement thereto did not include penalties as part of the secured amount, the same
should be excluded from the foreclosure amount or bid price, even if such penalties are
provided for in the final Promissory Note, or PN 9707237. The RTC dismissed the case
of petitioners and upheld the stipulation on interest as valid since itauthorized both the
increase and decrease of interest rates. However, the Court of Appeals disagreed and
held that “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.” On the issue of penalties, the
CA ruled that the 24% penalty stipulated in PN 9707237 is covered by the phrase “and
other obligations owing by the mortgagor to the mortgagee” in the Real Estate Mortgage
and should thus be added to the amount secured by the mortgages. Hence, the present
Petition.

ISSUES: (1) whether the interest rate provision in the Credit Agreement and the
Amendment to Credit Agreement should be declared null and void, for they relegated to
PNB the sole power to fix interest rates, and (2) whether the penalties should be
included in the secured amount subject to foreclosure, when no penalties are mentioned
in the Real Estate Mortgage

HELD: Escalation clauses and removal of interest rate ceiling

1. Escalation clauses contained in credit agreements are authorized by Section 2 of

Presidential Decree No. 1684 which further amended Act No. 2655 (The Usury Law), as
follow: Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be increased in
the event that the applicable maximum rate of interest is increased by law or by the
Monetary Board; 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.

2. 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 or bearances. Pursuant to
such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series
of 1982, Section 5 of which provides: Sec. 5. Section 1303 of the Manual of Regulations
(for Banks and Other Financial Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges. — The rate of interest, including commissions,
premiums, fees and other charges, on any loan, or forbearance of any money, goods or
credits, regardless of maturity and whether secured or unsecured, shall not be subject
to any ceiling prescribed under or pursuant to the Usury Law, as amended.

3. PD. No. 1684 and C.B. Circular No. 905 allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, 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. Fixing of interest rates
cannot be left to the sole discretion of one party

4. In a number of decided cases, the Court struck down provisions in credit documents
issued by PNB to 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.”

5. We cannot countenance PNB’s posturing that the escalation clause gives it

unbridled right to unilaterally upwardly adjust the interest on the [petitioners]’ loan. That
would completely take away from[petitioners] 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.

6. This lack of consent by the petitioners has been made obvious by the fact that
petitioners had to sign the promissory notes in blank, since the imposable interest rates
have yet to be determined and fixed byPNB’s Treasury Department in Manila.

7. Moreover, PNB'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.

8. Any modification in the contract, such as the interest rates, must be made with the
consent of the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the agreement.
In the case of loan agreements, the rate of interest is a principal condition, if not the
most important component. Thus, any modification thereof must be mutually agreed
upon; otherwise, it has no binding effect.

9. 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.

10. A contract containing a condition which makes its fulfillment dependent

exclusively upon the uncontrolled will of one of the contracting parties, is void.
Hence, even assuming that the loan agreement between the PNB and the
[petitioners] gave the PNB a license to increase the interest rate at will during the term
of the loan, that license would have been null and void for being violative of the principle
of mutuality essential in contracts. PNB violated the Truth in Lending Act when it
required the borrower spouses to sign the credit documents in blank, and then
unilaterally filling them up later on

11. It appears that by its acts, PNB violated the Truth in Lending Act, or Republic Act
No. 3765, which was enacted “to protect x x x citizens from a lack of awareness of the
true cost of credit to the user by using a full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment to the national economy.” The
law “gives a detailed enumeration of the specific information required to be disclosed,
among which are the interest and other charges incident to the extension of credit.

12. 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.

13. Banks cannot claim substantial compliance by furnishing the debtors with the
financial information afterwards. Section 4 of the Truth in Lending Act clearly provides
that the disclosure statement must be furnished prior to the consummation of the
transaction. The law seeks to protect debtors by permitting them to fully appreciate the
true cost of their loan, to enable them to give full consent to the contract, and to properly
evaluate their options in arriving at business decisions.

14. The fact that petitioners later received several statements of account
detailing its outstanding obligations does not cure PNB’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. Neither may the statements be considered proposals
sent to secure the petitioners’ conformity; they were sent after the imposition and
application of the interest rate, and not before. And even if it were to be presumed that
these are proposals or offers, there was no acceptance by petitioners. “No one
receiving a proposal to modify a loan contract, especially regarding interest, is obliged
to answer the proposal.”

15. 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 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.1 year period to file
action for violation of the Truth in Lending Act has prescribed16. However, the one-year
period within which an action for violation of the Truth in Lending Act may be filed
evidently prescribed long ago, or sometime in 2001, one year after petitioners received
the March2000 demand letter which contained the illegal charges. Petitioners cannot
be estopped by their agreement to the loan contracts because estoppel cannot be
predicated on an illegal act17. Petitioners are correct in arguing that estoppel should not
apply to them, for estoppel 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.” Interest rate applicable18. 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.

19. 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 which expired
on November 21, 1989 and was paid by petitioners, 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.

20. 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 and Bangko Sentral ng Pilipinas-Monetary Board Circular No.
799.21. The interests paid by petitioners should be applied first to the payment of the
stipulated or legal and unpaid interest, as the case may be, and later, to the capital or
principal. PNB should then refund the excess amount of interest that it has illegally
imposed upon petitioners. The amount to be refunded refers to that paid by petitioners
when they had no obligation to do so.
 SPOUSES ABELLA VS. SPOUSES ABELLA
G.R. No. 195166, July 8, 2015

FACTS: In their Complaint, petitioners alleged that respondents obtained a

loan from them in the amount of P500,000.00. The loan was evidenced by an
acknowledgment receipt dated March 22, 1999and was payable within one (1) year.
Petitioners added that respondents were able to pay a... total ofP200,000.00—
P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00. Respondents alleged that the amount involved did not pertain to a loan
they obtained from petitioners but was part of the capital for a joint venture involving the
lending of money. Respondents further alleged that the one year averred by petitioners
was not a deadline for payment but the term within which they were to return the money
placed by petitioners should the joint venture prove to be not lucrative. They claimed
that the entire amount of P500,000.00 was disposed of in accordance with their agreed
terms and... conditions and that petitioners terminated the joint venture, prompting them
to collect from the joint venture's borrowers. They were, however, able to collect only to
the extent ofP200,000.00; hence, the P300,000.00 balance remained unpaid. The Court
of Appeals noted that while the acknowledgement receipt showed that interest was to
be charged, no particular interest rate was specified at the time respondents were
making interest payments of 2.5% per month, these interest payments were invalid for
not being properly stipulated by the parties. Noted that interest in the concept of actual
or compensatory damages accrues only from the time that demand (whether
judicial or extrajudicial) is made. It reasoned that since respondents received
petitioners' demand letter only on July 12, 2002, any interest in the concept of
actual or compensatory damages due should be reckoned only from then.
Thus, the payments for the 2.5%monthly interest made after the perfection of the loan
in 1999 but before the demand was made in 2002were invalid. Petitioners insist that
respondents' consistent payment of interest in the year following the perfection of
the loan showed that interest at 2.5% per month was properly agreed upon despite its
not having been expressly stated in the acknowledgment receipt. They add that during
the proceedings before the Regional Trial Court, respondents admitted that interest was
due on the loan. Respondents entered into a simple loan or mutuum, rather than a joint
venture, with petitioners. This is to acknowledge receipt of the Amount of Five Hundred
Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable within one (1) year
from date hereof with interest.
 ISSUE: Whether interest accrued on respondents' loan from petitioners, If so, at
what rate; whether petitioners are liable to reimburse respondents for the Litter's
supposed excess payments and for interest.

HELD: 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 o state the exact rate of interest. Jurisprudence is
clear about the applicable interest rate if a written instrument fails to specify a rate. In
Spouses Toring v. Spouses Olan,35 this court clarified the effect of Article 1956 of the
Civil Code and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or
forbearance of money, according to the Civil Code, the interest due should be that
stipulated in writing, and in the absence thereof, the rate shall be 12% per annum."

Thus, from the foregoing, in the absence of an express stipulation as to the rate
of interest that would govern the parties, the rate of legal interest for loans or
forbearance of any money, goods or credits and the rate allowed in judgments shall no
longer be twelve percent (12%) per annum — as reflected in the case of Eastern
Shipping Lines and Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 —
but will now be six percent (6%) per annum effective July 1, 2013. It should be
noted, nonetheless, that the new rate could only be applied prospectively
and not retroactively. Consequently, the twelve percent (12%) per annum legal interest
shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%)
per annum shall be the prevailing rate of interest when applicable.
 LIGUTAN V. COURT OF APPEALS
G. R. No. 138667, February 12, 2002

FACTS: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in
the amount of P120,000.00 from Security Bank and Trust Co. The obligation matured
and the bank granted an extension. Despite several demands from the Bank, petitioners
failed to settle the debt which then amounted to P114,416.10. The Bank sent a final
demand letter however petitioners still defaulted on their obligation. The Bank then filed
a complaint for recovery of the due amount. Petitioners instead of presenting their
evidence had the schedule reset for two consecutive occasions. On the third hearing
date, the trial court resolved to consider the case submitted for decision.

Two years later petitioners filed a motion for reconsideration which was denied
by the trial court. Petitioners then interposed an appeal with the Court of Appeals, the
appellate court affirmed the judgement of the trial court except the 2% service charge
which was deleted pursuant to Central Bank Circular No. 763. The two parties filed their
motions for reconsiderations and the Court of Appeals resolved the two motions: that
the payment of interest and penalty commence on the date when the obligation became
due and a penalty of 3% per month would suffice. The petitioners filed an omnibus
motion for reconsideration which was then denied by the Court of Appeals.

ISSUE: Whether or not the 15.189% interest and the penalty of 3% per month
(36% per annum) is exorbitant, iniquitous, and unconscionable.

HELD: The question of whether a penalty is reasonable or iniquitous can be

partly subjective and partly objective. Its resolution will depend on such factors as, but
not 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.

The Court of Appeals, exercising its good judgement has reduced the penalty
interest from 5% a month to 3% a month. Given the circumstances and 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.
 The stipulated interest of 15.189% per annum, does not appear as being
excessive. The essence or rationale for the payment of interest, quite often referred to
as cost of money, is not exactly the same as that as a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that
effect, the two being distinct concepts which may separately be demanded. The interest
prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank’s existence.

EASTERN SHIPPING VS CA
GR No. 97412, 12 July 1994

FACTS: Two fiber drums were shipped owned by Eastern Shipping from Japan.
The shipment as insured with a marine policy. Upon arrival in Manila unto the custody of
metro Port Service, which excepted to one drum, said to be in bad order and which
damage was unknown the Mercantile Insurance Company. Allied Brokerage
Corporation received the shipment from Metro, one drum opened and without seal.
Allied delivered the shipment to the consignee’s warehouse. The latter excepted to one
drum which contained spillages while the rest of the contents was adulterated/fake. As
consequence of the loss, the insurance company paid the consignee, so that it became
subrogated to all the rights of action of consignee against the defendants Eastern
Shipping, Metro Port and Allied Brokerage. The insurance company filed before the trial
court. The trial court ruled in favor of plaintiff an ordered defendants to pay the former
with present legal interest of 12% per annum from the date of the filing of the complaint.
On appeal by defendants, the appellate court denied the same and affirmed in toto the
decision of the trial court.

ISSUE: Whether the applicable rate of legal interest is 12% or 6%; whether the
payment of legal interest on the award for loss or damage is to be computed from the
time the complaint is filed from the date the decision appealed from is rendered.

HELD: The Court held that the legal interest is 6% computed from the decision of
the court a quo. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damaes awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty.

When the judgment of the court awarding a sum of money becomes final and
executor, the rate of legal interest shall be 12% per annum from such finality until
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of money.
 The interest due shall be 12% PA to be computed fro default, J or EJD.

(2) From the date the judgment is made. Where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or EJ 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 judgment of
the court is made.

(3) The Court held that it should be computed from the decision rendered by the
court a quo.
NACAR VS GALLERY FRAMES
G. R. No. 189871, August 13, 2013

FACTS: Dario Nacar filed a labor case against Gallery Frames and its owner
Felipe Bordey, Jr. Nacar alleged that he was dismissed without cause by Gallery
Frames on January 24, 1997. On October 15, 1998, the Labor Arbiter (LA) found
Gallery Frames guilty of illegal dismissal hence the Arbiter awarded Nacar P158,919.92
in damages consisting of backwages and separation pay.

Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme
Court affirmed the decision of the Labor Arbiter and the decision became final on May
27, 2002.

After the finality of the SC decision, Nacar filed a motion before the LA for
recomputation as he alleged that his backwages should be computed from the time of
his illegal dismissal (January 24, 1997) until the finality of the SC decision (May 27,
2002) with interest. The LA denied the motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was illegally dismissed (January 24,
1997) until the decision of the LA (October 15, 1998). The LA reasoned that the said
date should be the reckoning point because Nacar did not appeal hence as to him, that
decision became final and executory.

ISSUE: Whether or not the Labor Arbiter is correct.

RULING: No. There are two parts of a decision when it comes to illegal dismissal
cases (referring to cases where the dismissed employee wins, or loses but wins on
appeal). The first part is the ruling that the employee was illegally dismissed. This is
immediately final even if the employer appeals – but will be reversed if employer wins
on appeal. The second part is the ruling on the award of backwages and/or separation
pay. For backwages, it will be computed from the date of illegal dismissal until the date
of the decision of the Labor Arbiter. But if the employer appeals, then the end date shall
be extended until the day when the appellate court’s decision shall become final.
Hence, as a consequence, the liability of the employer, if he loses on appeal, will
increase – this is just but a risk that the employer cannot avoid when it continued to
seek recourses against the Labor Arbiter’s decision. This is also in accordance with
Article 279 of the Labor Code.

HERMOJINA ESTORES v. SPS. ARTURO AND LAURA SUPANGAN

GR No. 175139, 2012-04-18

FACTS: Petitioner Hermojina Estores and respondent-spouses Arturo and Laura

Supangan entered into a Conditional Deed of Sale. Whereby petitioner offered to sell,
and respondent-spouses offered to buy, a parcel of land

After almost seven years from the time of the execution of the contract and
notwithstanding payment of P3.5 million on the part of respondent-spouses, petitioner
still failed to comply with her obligation as expressly provided in... contract.

respondent-spouses demanded the return of the amount of P3.5 million within 15

days from receipt of the letter... petitioner acknowledged receipt of the

P3.5 million and promised to return the same within 120 days. Respondent-
spouses were amenable to the proposal provided an interest of 12% compounded
annually shall be imposed on the P3.5 million.

When petitioner still failed to return the... amount despite demand, respondent-
spouses were constrained to file a Complaint against herein petitioner. The RTC
rendered its Decision finding respondent-spouses entitled to interest but only at the rate
of 6% per annum. The CA rendered the assailed Decision affirming the ruling of the
RTC finding the imposition of 6% interest proper.

However, the same shall start to run only from when respondent-spouses
formally demanded the return of their money and not from when the contract was
executed as held by the RTC.

Petitioner insists that she is not bound to pay interest on the P3.5 million because
the Conditional Deed of Sale only provided for the return of the downpayment in case of
failure to comply with her obligations.
 Respondent-spouses aver that it is only fair that interest be imposed on the
amount they paid considering that petitioner failed to return the amount upon demand
and had been using the P3.5 million for her benefit.

ISSUES: Whether the imposition of interest and attorney's fees is proper

RULING: The petition lacks merit.

We sustain the ruling of both the RTC and the CA that it is proper to impose
interest notwithstanding the absence of stipulation in the contract. Article 2210 of the
Civil Code expressly provides that "interest may, in the discretion of the court, be
allowed upon... damages awarded for breach of contract." In this case, there is no
question that petitioner is legally obligated to return the P3.5 million because of her
failure to fulfill the obligation under the Conditional Deed of Sale, despite demand.

Anent the interest rate, the general rule is that the applicable rate of interest
"shall be computed in accordance with the stipulation of the parties.

Absent any stipulation, the applicable rate of interest shall be 12% per annum
"when the obligation arises out of a loan or a forbearance of money, goods or credits.
In other cases, it shall be six percent (6%)."

In this case, the parties did not stipulate as to the applicable rate of interest. The
only question remaining therefore is whether the 6% as provided under Article 2209 of
the Civil Code, or 12% under Central Bank Circular No. 416, is due.

The contract involved in this case is admittedly not a loan but a Conditional Deed
of Sale. However, the contract provides that the seller (petitioner) must return the
payment made by the buyer (respondent-spouses) if the conditions are not fulfilled.
There is no question that they have in fact, not been fulfilled as the seller (petitioner)
has admitted this. Notwithstanding demand by the buyer (respondent-spouses), the
seller (petitioner) has failed to return the money and... should be considered in
default from the time that demand was made

Even if the transaction involved a Conditional Deed of Sale, can the stipulation
governing the return of the money be considered as a forbearance of money which
required payment of interest at the rate of 12%? We believe so.

"Forbearance of money, goods or credits" is meant to have a separate meaning

from a loan, otherwise there would have been no need to add that phrase as a loan is
already sufficiently defined in the Civil Code.

Forbearance of money, goods or credits should therefore refer to arrangements

other than loan agreements, where a person acquiesces to the temporary use of his
money, goods or credits pending happening of certain events or fulfillment of certain
conditions. In this case, the respondent-spouses parted with their money even before
the conditions were fulfilled. They have therefore allowed or granted forbearance to the
seller (petitioner) to use their money pending fulfillment of the conditions. They were
deprived of the use of their money for the period pending fulfillment of the conditions
and when those conditions were breached, they are entitled not only to the return of the
principal amount paid, but also to compensation for the use of their money. And the
compensation for the use of their money, absent any stipulation, should be the same
rate of legal interest applicable to a loan since the use or deprivation of funds is similar
to a loan.

Petitioner's unwarranted withholding of the money which rightfully pertains to

respondent-spouses amounts to forbearance of money which can be considered as an
involuntary loan. Thus, the applicable rate of interest is 12% per annum.
UCPB VS SPOUSES BELUSO
GR No. 159912, August 17, 2007

FACTS: Petition for Review on Certiorari declaring void the interest rate provided
in the promissory notes executed by the respondents Spouses Samuel and Odette
Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB)
UCPB granted the spouses Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the former credit of up to a
maximum amount of P1.2 Million pesos for a term ending on30 April 1997. The
spouses Beluso constituted, other than their promissory notes, a real estate mortgage
over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T-31539
and T-27828, as additional security for the obligation. The Credit Agreement was
subsequently amended to increase the amount of the Promissory Notes Line to a
maximum of P2.35 Million pesos and to extend the term thereof to 28 February 1998.
On 30 April 1997, the payment of the principal and interest of the latter two
promissory notes were debited from the spouses Beluso’s account with UCPB; yet, a
consolidated loan for P1.3 Million was again released to the spouses Beluso under
one promissory note with a due date of28 February 1998. To completely avail
themselves of the P2.35 Million credit line extended to them by UCPB, the spouses
Beluso executed two more promissory notes for a total of P350,000.00.
However, the spouses Beluso alleged that the amounts covered by these last
two promissory notes were never released or credited to their account and, thus,
claimed that the principal indebtedness was only P2 Million. The spouses Beluso,
however, failed to make any payment of the foregoing amounts. On 2 September
1998, UCPB demanded that the spouses Beluso pay their total obligation of
P2,932,543.00 plus 25% attorney’s fees, but the spouses Beluso failed to comply
therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by
the spouses Beluso to secure their credit line, which, by that time, already ballooned to
P3,784,603.00. On 9 February 1999, the spouses Beluso filed a Petition for Annulment,
Accounting and Damages against UCPB with the RTC of Makati City. Trial court
declared in its judgment that: (a.) the interest rate used by [UCPB] void (b.) the
foreclosure and Sheriff’s Certificate of Sale void (c.) UCPB is ordered to return to [the
spouses Beluso] the properties subject of the foreclosure (d.) UCPB to pay [the spouses
Beluso] the amount ofP50,000.00 by way of attorney’s fees (e) UCPB to pay the costs
of suit.f.Spouses Beluso] are hereby ordered to pay [UCPB] the sum of
P1,560,308.00.8. Court of Appeals affirmed Trial court's decision subject to the
modification that defendant-appellant UCPB is not liable for attorney’s fees or the costs
of suit.

ISSUES:

1. Whether or not interest rate stipulated was void.

Yes, stipulated interest rate is void because it contravenes on the principle

of mutuality of contracts and it violates the Truth in lending Act. The provision stating
that the interest shall be at the “rate indicative of DBD retail rate or as determined by the
Branch Head” is indeed dependent solely on the will of petitioner UCPB. Under such
provision, petitioner UCPB has two choices on what the interest rate shall be: (1)
a rate indicative of the DBD retail rate; or (2) a rate as determined by the
Branch Head. As UCPB is given this choice, the rate should be categorically
determinable in both choices. If either of these two choices presents an opportunity for
UCPB to fix the rate at will, the bank can easily choose such an option, thus making the
entire interest rate provision violative of the principle of mutuality of contracts. In
addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB.As earlier
discussed, the interest rate provision therein does not sufficiently indicate with
particularity the interest rate to be applied to the loan covered by said
promissory notes which is required in Truth in Lending Act

2. Whether or not Spouses Beluso are subject to 12% interest and compounding
interest stipulations even if declared amount by UCPB was excessive.

Yes. Default commences upon judicial or extrajudicial demand. The excess

amount in such a demand does not nullify the demand itself, which is valid with respect
to the proper amount. There being a valid demand on the part of UCPB, albeit
excessive, the spouses Beluso are considered in default with respect to the
proper amount and, therefore, the interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually
recognized that said legal interest should be imposed, thus: “There being no valid
stipulation as to interest, the legal rate of interest shall be charged.”[27]It seems that
the RTC inadvertently overlooked its non-inclusion in its computation. It must likewise
uphold the contract stipulation providing the compounding of interest. The provisions
in the Credit Agreement and in the promissory notes providing for the compounding
of interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the
spouses Beluso in their petition with the RTC. The compounding of interests has
furthermore been declared by this Court to be legal.
 3. Whether or not foreclosure was void

No. The foreclosure proceedings are valid since there was a valid demand
made by UCPB upon the spouses Beluso. Despite being excessive, the spouses
Beluso are considered in default with respect to the proper amount of their
obligation to UCPB and, thus, the property they mortgaged to secure such
amounts may be foreclosed. Consequently, proceeds of the foreclosure sale should be
applied to the extent of the amounts to which UCPB is rightfully entitled.